The USDA loan offers a zero down payment loan program. It’s a great program for first-time buyers. But, it’s not restricted to those who never owned a home before. The USDA allows eligible borrowers to take advantage of the program. The caveat is you can’t currently own a home. If you do, you must have ample proof regarding why you can’t use your current home. A few good examples include being relocated for work or it no longer suits your family. Aside from the housing restrictions, though, you must meet the following guidelines.
Perhaps the hardest factor to meet is the income eligibility. You can make too much and not qualify for a USDA loan. This has nothing to do with your debt ratio, though. This is strictly for eligibility purposes. The USDA created their program to help low-income families. Therefore, if you make too much, you won’t qualify.
You can find out if your income qualifies you here. Keep in mind, the USDA counts the entire household income – not just your income. For example, let’s say grandma and grandpa live with you. In addition, you have a 19-year old son who works. Everyone’s income counts in the equation. This includes grandma, grandpa, and your son.
Luckily, the USDA provides allowances. Any children living with you, including those over 18 who go to school full-time provide you with a $480 allowance per child. Any elderly people over the age of 62 provide an allowance of $400. Lastly, any disabled persons living with you provide you with a discount of $480. The USDA subtracts this right from your total household income.
Once you know you qualify for the program, you must find a USDA eligible home. It’s not as hard as it sounds. The home must fall within the USDA boundaries. You can view them here. Basically, the USDA must consider the area rural. According to the USDA, this means outside of the city lines and a low population. There are many areas that aren’t technically rural that the USDA allows. View the map and see which areas near you might qualify.
Decent Housing for Subsequent and First-Time Buyers
The USDA program doesn’t fund loans for luxurious homes. It’s mean to help low-income families find decent housing that they don’t have to rent. The home also can’t have a pool. The USDA has the final say regarding what other accommodations they do and do not allow.
That being said, the home must be in good condition. If there are issues, the USDA may require they get fixed before you close on the home. The USDA has a specific appraisal form the appraiser must complete. This shows the USDA the condition of the home and whether it meets their requirements. If there are issues, you can negotiate with the seller to fix them before you close on the home.
Paying for Closing Costs
Sometimes, borrowers have a hard time coming up with the money for the closing costs. Even though you don’t need a down payment for a USDA loan, you still need to pay the closing costs. They can vary between 3 and 5% of the loan amount. Here are a few ways to make it happen:
- Ask the seller to contribute. The USDA allows sellers to pay up to 3% of the sales price of the home in closing costs. The seller may only provide money for actual costs, though.
- Obtain gift money from relatives. If you have relatives willing to help you close on your loan, the USDA allows it. They must provide a gift letter and can only pay for the actual closing costs.
- Use money from your loan. The USDA allows you to borrow up to 100% of the appraised value of the property. If the sales price is less than the appraised value, you can use the rest of the money to pay the closing costs.
If you do pay the closing costs on your own, you’ll need to verify the assets. The lender must verify the funds are yours and not borrowed funds. Typically, lenders ask for 2 months’ of bank statements to verify your funds. However, there’s such a thing as having too much money. If you can prove you have 20% to put down on a home, the lender won’t be able to provide USDA financing.
Qualifying for Other Programs
Another caveat of the USDA program is you can’t be eligible for any other loan program. As we discussed above, if you have 20% to put down, you might be eligible for a conventional loan. The USDA won’t lend to you then. They reserve their funds for borrowers who don’t qualify for any other program. The same goes for other government backed programs including FHA and VA loans. If you qualify for either program, the USDA won’t give you a loan.
Going Through the Process
First-time buyers and subsequent buyers go through the same process with the USDA. Once a lender determines you are eligible for the program, they must qualify you for it. This means providing income, asset, and credit documents. You complete a loan application and deal with an underwriter. They go through your loan file and ask for supporting documentation. Once they determine you qualify for the loan, they wait for the appraisal. If the appraisal passes the USDA’s requirements, the underwriter sends the file to the USDA.
The USDA has the final say. Usually if a lender sends the right documents, the USDA approves the file within a week. It depends on their workload and the status of the file. Once the USDA approves the file, you are clear to close.
The most common borrowers for the USDA loan are first-time buyers. However, many borrowers who lost their home and want to start over find relief with this program. Repeat borrowers also use the program, especially when they can’t stay in their home due to circumstances outside of their control.